Overview: The US dollar recorded lows for the month against many of the major currencies yesterday but has come back bid today. We had anticipated some consolidation ahead of the conclusion of the FOMC meeting tomorrow, and the dollar's downside momentum faded. Yet, today’s gains have been fueled by new tariff threats. In particular, Bessent, the new Treasury Secretary, said to be a moderate, reportedly was advocated increasing a universal tariff by 2.5% a month until reaching the levels President Trump advocated, ostensibly allowing time for business and countries to adjust (?) and provide negotiating opportunities. However, President Trump warned 2.5% may not be sufficient and soon tariffs will be announced on semiconductor chips, pharmaceuticals, steel, copper, and aluminum. The greenback is higher against all the G10 currencies. Most of the currencies are off 0.4%-0.6%, but the Canadian dollar and Norwegian krone, which are 0.2%-0.3% lower. Most emerging market currencies are softer.
Many Asia Pacific equity markets are closed today, but most that were open traded lower. India and Singapore are noted exceptions. Europe's Stoxx 600 is snapping two days of slippage and is up 0.7% to new record highs. After sharp losses yesterday, the S&P 500 and NASDAQ futures are trading firmer (~0.35%-0.65%). While equities in Europe and the US are higher, it has sapped the bid from the bond market. Benchmark 10-year yields are a little firmer in Europe and the 10-year US Treasury yield is up 3.5 bp to almost 4.57%. Ironically, gold seemed to have been dragged lower by drop in equities yesterday, and its 1% loss was the largest in a month. It has stabilized today and hovering around little changed levels near $2742. March WTI is also stabilizing in quiet trade today after falling 2% for the second time in five sessions. It has mostly held above the ~$73.15 settlement but had not been able to retake $74.
USD: The new tariff threat by the US is lifting the dollar broadly today and the Dollar Index has re-taken the 107.75 area, which is a key to the bearish pattern that had formed this month. Still, it is too early to determine whether the pullback since the January 13 high is over. The 108.20 area is the next immediate hurdle. We had anticipated that after yesterday's downside momentum faded that the greenback would likely consolidate ahead of tomorrow's conclusion of the FOMC meeting. Today's December durable goods orders may help economists fine-tune Q4 GDP estimates ahead of Thursday's announcement. Boeing orders jumped in December, though the cancelations nearly offset the new orders, but still on balance should help orders recover from November's 1.2% decline. Boeing also delivered more planes in December than it had in October and November combined. Also, US house prices look to have edged up in November. The Conference Board's measure of consumer confidence may draw attention after the University of Michigan's consumer sentiment survey deteriorated for the first time in six months.
EURO: The economic calendar is light until Thursday's ECB meeting. The euro is pulling back after extending its recovery to almost $1.0535 yesterday. The roughly 3.5% advance since the January 13 low (~$1.0180) is the largest advance since last July and August. The $1.0560 area is the halfway point of the decline since the US election. The euro has fallen to $1.0420 today and must regain the $1.0460 area or face a test and possible break of $1.04. Below $1.04, initial support may not appear until closer to $1.0355 initially. So far, the price action, though, is consistent with a consolidative phase ahead of tomorrow's FOMC decision and Thursday's ECB meeting.
CNY: Mainland China celebrates the Lunar New Year. The dollar is trading firmer against the offshore yuan. The greenback peaked at the end of last year near CNH7.37 and set the low for the January last Friday near CNH7.2345. It enjoys a firmer tone today and approached the pre-weekend high (~CNH7.2880). The CNH7.30 area capped it in the second half of last week. After falling by almost 3% in 2024, the offshore yuan is up about 1.3% this month coming into today. The correlation between changes in the yuan and yen has not recovered from the unwinding of carry-trade strategies last August. The yen gained nearly 1% yesterday, its best day since the end of November, while the offshore yuan was practically flat.
JPY: The sharp drop in US stocks as China's DeepSeek raises questions about valuations spurred a sharp drop in US yields, which, in turn, helped lift the yen. The dollar was sold through the trendline connecting the mid-September low (~JPY139.60) and the early December low (~JPY148.65). The dollar has come back bid today, arguably helped by the firmer US rates. The greenback has recovered to almost JPY156 from almost JPY153.70, the low for the month recorded yesterday. Yesterday's high was closer to JPY156.25. Without taking this out, it will be the fourth consecutive session of lower highs for the dollar.
GBP: Sterling depreciated by about 10% from late September through mid-January. It reached almost $1.2525 yesterday, approximately a 3.5% recovery. The month's high was set near $1.2575 on January 7, which is also the (50%) retracement of the losses since the US election. A little higher, around $1.2610, the (38.2%) retracement of the losses since late September is found. Sterling stalled today and has pulled back to the top of a support area that found between $1.2400 and $1.2425. A break could signal an initial test on $1.2360.
CAD: The US dollar has been chopping between around CAD1.4300 to a little above CAD1.4400 in recent days, but is threatening to break to the upside. Among the G10 currencies, the Canadian dollar joins sterling as the only ones not to gain on the dollar this month. Today's losses put the Canadian dollar down about 0.2% on the month compared with sterling's 0.60% loss. The Canadian dollar is sensitive to Trump's tariff threats and the divergence of monetary policy. The Bank of Canada is widely anticipated deliver a quarter-point rate cut tomorrow while the Federal Reserve stands pat. The broad, even if choppy sideways price action since mid-December, has alleviated the over-extended momentum indicators without much of a pullback in the US dollar. Arguably, this contributes to the sense that the consolidation is constructive for the greenback. Last week's tariff-threat induced US dollar high was near CAD1.4515.
AUD: The Australian dollar was the second weakest of the G10 currency yesterday with about a 0.35%, a little better than the Norwegian krone's 0.45% loss. The dollar bloc and Scandis underperformed, while the yen and Swiss franc were the strongest. After finishing last week above $0.6300, the Aussie pulled back to $0.6275 before finding good bids in both Europe and North America yesterday. However, follow-through selling today has seen it fray support near $0.6250. It is straddling the support in the European morning but a close below it undermines the technical tone. A break of $0.6230 could spur a move $0.6200 and expose this month's low (~$0.6130). Australia report Q4 CPI the first thing tomorrow. The year-over-year pace is expected to slow to around 2.5% from 2.8%, and the underlying measures are also expected to moderate.
MXN: When everything was said and done yesterday, the Mexican peso fell more than the Colombian peso (~-2.0% vs. -0.5%). Mexico remains particularly sensitive to US tariff threats. The fact that President Trump has declared an emergency at the southern border warns that Mexico may be in the US proverbial crosshairs. The February 1 possible imposition of new US tariffs on Mexico warns against expecting the peso to recover this week. On the other hand, the US aggressiveness has brought Mexico and Canada together. A few months ago, it appeared that Canada was willing to eschew Mexico in the review of the USMCA, but now there seems to be a rapprochement. And a press report indicates steel companies from both countries may be turning down US orders for fear disruption from the tariff risks. The dollar rose to MXN20.75 yesterday and edged a little higher initially today a little above MXN20.78. However, the peso found a bid in Europe, but it looks to have run its course or nearly so.
Reviewed by Marc Chandler
on
January 28, 2025
Rating:
